Module 3: Accounting Equation & Account Classification

Question 1

Accounting Equation

Answer 1

Asset = liabilities + equity

Question 2

What are assets?

Answer 2

• Resources owned by the company

Divided into Current and Non-Current Assets

Question 3

What are current assets?

Answer 3

• Assets that will be used in less than a year

1. Cash: currency, coins and checks
2. Investment in trading securities: marketable securities or short-term investments in stocks
3. Trade and other receivables: “collectibles”, notes receivable, account receivable, interest receivable, advances to employees
4. Merchandise Inventory: goods owned for sale
5. Prepaid Expenses: supplies, prepaid rent, prepaid insurance, prepaid advertising

Question 4

What are non-current assets?

Answer 4

• Assets used up long term (exceed 1 year)

1. Land
2. Building
3. Equipment
4. Furniture and Fixtures

Question 5

What are liabilities?

Answer 5

• Economic obligations of the company
• Current and Non-current

Question 6

What are current liabilities?

Answer 6

• Liabilities to be paid within one year

1. Accounts Payable
2. Notes Payable (within 1 year)
3. Interest Payable
4. Accrued Expenses (rent and utilities)
5. Unearned Income - payment received for goods or services not yet delivered
6. Other current liabilities

Question 7

What are non-current liabilities?

Answer 7

• Liabilities to be paid in more than a year’s time

1. Notes payable (exceed 1 year)
2. Mortgage Liabilities
3. Bonds Payable
4. Other non-current liabilities

Question 8

What is equity?

Answer 8

• Net assets/ownership value in a company (Assets - Liabilities = Equity)

1. Capital: owner’s investment
2. Drawing (debit): withdrawal of assets for personal use by owner
3. Revenue: Sales or service income, other revenue, increase equity (advertising, licensing or royalties)
4. Expenses (debit): costs of goods sold, operating expenses, decrease equity (utilities, rent, salaries, marketing, insurance, office supplies when used, maintenance, others)